How Inflation, Supply Chain, Energy Costs and Property Valuations Amplify Hurricane Risk

By: Steve Hernandez | May 8, 2022

Steve serves as Senior Vice President, Risk Control for CNA. In this role, he is responsible for strategic direction and leadership of Risk Control for CNA's $2.8 billion commercial property and casualty business, which is comprised of Business Insurance (smaller commercial accounts) and Commercial Insurance (middle market and risk management accounts). This includes developing Risk Control products and services that align with CNA's commercial underwriting strategies.

The ability to prepare, respond and recover from a disruptive event, like a hurricane, may be correlated to a company’s bottom line and their business resiliency.

According to weather experts, an above average hurricane season is expected in 2022 with at least 19 named storms and nine hurricanes — four of which may be Category 3 or higher.

With National Hurricane Preparedness week underway, now is the time to take a closer look at how increased hurricane activity and current global conditions may broaden the following risks for many companies during the 2022 hurricane season.

Impacts of Inflation

As of April 2022, inflation was up 8.5%, a 40-year high.

While many business owners have noticed an increase in pricing on a wide variety of raw materials and other goods, it is important to consider the impact of concurrent increases along the supply chain because of the interplay between foreign disruptions, increased demand and decreased supply.

The labor force, still in disarray from the wide-reaching impacts of the COVID-19 pandemic, is now feeling the broad sting of inflationary pressures as well.

According to the Consumer Price Index, while energy costs are the main driver of increased costs (32% in 12 months), most categories are seeing broad, double-digit increases well above historical averages.

Since few (if any) businesses can afford to maintain wage increases at a similar pace, inflation may further fuel a shift in jobs that is affecting businesses across numerous sectors. If employees with key incident, crisis and continuity management roles are lost, businesses may enter hurricane season less equipped to weather these types of incidents.

Additionally, many companies are now transitioning into hybrid work environments with a mix of office and remote responsibilities. This might trigger the need to reexamine and update incident response plans and recovery and restart measures to reflect the new workplace realities.

Energy Costs

The mid-term outlook for crude oil prices is still grim, with sanctions and other supply challenges outweighing a projected drop in demand.

With the days of $60-$70 a barrel crude behind us for now, businesses will continue to feel the impact to their bottom line as suppliers will pass their increased costs downstream.

With a greater chance of disruption from a hurricane event facing companies across the country, it is imperative that business leaders consider and plan for all of these downstream impacts.

Higher fuel prices alone can have a significant impact on a company’s bottom line. If restoration and recovery depend on refilling a 2,000-gallon tank needed for a generator or refueling an entire fleet of company vehicles, the costs can be staggering.

It is also worth noting the previously mentioned cost of living increases and how that may affect employees and businesses in more subtle ways.

Considering fuel prices today, some employees in coastal areas may decide to simply shelter in place versus fleeing the path of a hurricane. How that could impact recovery and restart efforts is worth reviewing and assessing the impact to business resiliency.

A Recovering Supply Chain

Companies today rely on a global supply chain that is still recovering from the impacts of the COVID-19 pandemic; intermittent and unpredictable shipping delays due to the COVID-19 pandemic shutdowns continue to impact cargo and shipping in Asia, compounded by raw materials shortages and labor challenges in many parts of the world.

A significant storm this hurricane season, or worse, multiple high impact events similar to the 2017 Atlantic basin season, could create significant recovery challenges for businesses.

Supply chain affects all aspects of a business’s functions — from being able to maintain business operations to promptly servicing and repairing materials after a disruptive event.

As an example, the recovery and restart process for businesses impacted by coastal hurricanes relies on an available supply of building materials, such as the materials necessary to repair a damaged roof. Whenever a major hurricane strikes, local supplies for such materials become more expensive and more scarce as demand increases rapidly after the storm.

In today’s world, however, material shortages already exist even before hurricane season; materials like ISO foam board that is used for roof insulation are in very short supply.

Additionally, much of what makes up the typical roof assembly, including foam board, derives from crude oil, so oil price pressures will add another stress point to the post storm recovery.

These compounding factors, combined with the aforementioned labor shortages, could result in extended restoration periods for companies with post-storm damage.

Global automotive supply challenges are yet another area to consider depending on the nature of the company’s industry.

During a hurricane, if business vehicles are damaged or destroyed the process of repairing or replacing them will be extended and even more arduous compared to pre-pandemic conditions.

Preventative measures — whether it be modifying operations or actively removing vehicles from harm’s way — can make a significant difference in how quickly a fleet-dependent business can get back up and running.

Downstream Risk: Building, Contents & Equipment Valuations

The combined impact of oil prices, inflation and supply chain challenges will likely increase the cost of restoring equipment and structures post-storm.

Companies must focus on ensuring that their buildings, contents and equipment valuations reflect current economic realities and replacement costs. Now is the time to review these metrics both internally and with insurance professionals, as undervaluation can put the business in an adverse position.

In addition to the current global factors and the COVID-19 pandemic, many businesses changed their approach to inventory, often stockpiling additional inventory on-site to shield against future shortages.

If properly allocated and kept out of harm’s way, this extra inventory may impact recovery in a positive way.

Conversely, if these increased inventories are exposed to the path of an oncoming storm, it could increase the potential loss at an exposed location and delay the recovery and restart of business operations, especially if multiple locations and revenue generating functions depend on the exposure locations.

The Time Is Now

In 2022, it is not enough to prepare for only the local, physical effects associated with the threat of a hurricane. Businesses also need to consider how the dynamics of the current world can intersect with and exacerbate these threats.

Now is the time for organizations to think critically about how today’s environment is impacting business operations, how a hurricane would change that, and where investments should be made to help lower risk during the upcoming hurricane season. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.